Warner Bros Discovery CEO vs Netflix: A new streaming war brewing in the town these days

A warm welcome to my 4th publication of Leeds 1888 this week.

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And now that we're chatting, here's what you can expect in today’s newsletter-

• Weekly box office chart

• What happened in the media & entertainment space last week, and

• Why the Warner Bros Discovery CEO blasts Netflix

What occurred in media and entertainment this week?

1. 'Westworld' and 'The Nevers' will soon be pulled from HBO Max- If you'd been meaning to catch up on Westworld even though it was cancelled before its fifth and final season, you may want to do so soon. The show is leaving the streaming service just over a month after it was cancelled. The Nevers, the sci-fi series Joss Whedon created for HBO, has also been cancelled and will be removed from the streaming platform before the second half of season one could debut next year.

2. 'Avatar: The Way of Water' is the first great high frame rate movie- The Avatar sequel deploys the technology in a unique way. Rather than using HFR throughout the entire movie, Cameron relies on it for major action sequences, while slower dialog scenes appear as if they're running at 24fps. To do that, the entire film actually runs at 48fps, while the calmer scenes use doubled frames to trick your brain into seeing them at the typical theatrical frame rate.

3. Amazon is picking up the TV and film rights to Warhammer 40,000- Warhammer shows and films may be coming to Prime Video in the next few years. Amazon has secured the global rights to Warhammer 40,000, according to Deadline, and Henry Cavill is set to star in and executive produce the franchise. The company's confirmation comes after the announcement by Games Workshop, the manufacturer behind the miniature wargame, that it has "reached an agreement in principle" with Amazon.

4. Lionel Messi's World Cup celebration is now the most-liked post on Instagram- Soccer megastar Lionel Messi finally secured the one prize that had eluded him during his illustrious career this weekend when Argentina won the World Cup. Afterward, the best player of the 21st century (yeah, I said it) added another record to his resume, as he now has the most-liked post on Instagram.

5. Viacom18 acquires media rights to Olympic Games 2024 for $31 million- Viacom18 Media has secured exclusive media rights to broadcast the Olympic Games Paris 2024 in the Indian subcontinent. It has also bagged the non-exclusive rights to the Winter Youth Olympic Games in Gangwon 2024. According to executives with knowledge of the matter, Viacom18 is believed to have paid roughly $31 million to bag the rights.

And in the story of the week, we will now discuss the trending news of this year in media & entertainment-

Well there is a new streaming war brewing in the town these days.

David Zaslav, the CEO of Warner Bros Discovery isn’t happy with Netflix.

What's the matter?

The crux of the issue is “MONEY”.

It’s always about Cash!Cash!Cash!

Zaslav is not very happy with the way Netflix deals are structured.

Netflix essentially pays its producers over the course of 18 to 24 months, which is not a new discovery.

What’s with the Netflix payment structure that made Zaslav go all vexed?

To understand Zaslav’s annoyance with Netflix, it's crucial to know how Netflix makes payments to filmmakers and producers.

Netflix's payment model differs from other streaming platforms.

Netflix buys shows at a rate of the cost of production plus about 30 percent of production costs, but it retains most of its future licensing rights.

That means Netflix deals are mainly ownership deals.

The production company signs away the majority of future revenue opportunities to the company for a larger cut upfront.

There is no extra profit if the show does well.

The problem lies here:

The way the payment deals are structured, It basically ties up the working capital of the producer and the producer has to wait for a good two years to get their invested money on the show back. It is not good for the balance sheet and definitely not what Zaslav appreciates.

We all want to be paid right upfront for the service we provide. Right?

As The Sandman was hitting season 2, the issue has intensified.

The outcome of the tussle has been that Zaslav has instructed his team to stop selling finished shows to Netflix for a few weeks.

The Sandman is a hit fantasy drama show produced by the Warner Bros. Television that was streaming on Netflix. The Neil Gaiman-developed DC series' audience numbers almost certainly justified its large budget to Netflix, with The Sandman racking up approximately 200 million viewership hours during its first 10 days of release. While this would seemingly make the decision to renew quick and easy, The Sandman Season 1 had been streaming for three whole months before Season 2 was given the go-ahead.

 Warner Bros. Television is one of the LARGEST suppliers of content to Netflix

Zaslav is one of the LARGEST suppliers of content to Netflix through Warner Bros. Television.

And this is where things become a bit complicated.

WBTV has supplied Netflix originals such as Sweet Tooth, which comes from Robert Downey Jr; Penn Badgley starrer serial killer thriller which is awaiting its 4th season-You; and not to forget Manifest which was cancelled by NBC after running for 3 seasons but it manifested success for Netflix after it became the most watched show worldwide on Netflix.

Coming back to The Sandman, 

 Zaslav doesn't like spending $15 million per episode and waiting for 2 years to be paid.

Zaslav could very well add the content onto HBO Max which is Warner Bros Discovery’s own streaming platform.

To give you the scale of the competition, it is worth mentioning here that HBO Max and Discovery+ are merging into one service sometime in 2023. The emerging platform will be a direct competitor to Netflix at a time when Netflix has lost more than 60% of its value in the past year after subscriber growth stopped for the first time in a decade, causing media and entertainment companies to rethink their streaming strategies.

And to add to this, Zaslav might be thinking as to why he is financing Netflix, his competitor streaming platform, by delaying the payment.

And here is how the conversation might have went:

Zaslav(to Netflix): If you want to buy a show that we make that we don't want for our own distribution, fine, here is our price. Give me my profit bro! We won’t sit around for two years for our rightful payment.

Netflix: Facepalm 🤦🏽

One of the Warner Bro Discovery insiders has been quoted saying, “It’s obviously the way the industry works and has worked with Netflix. He’s (Zaslav) paid big numbers [by Netflix] and the company has been happy with that. It’s like he suddenly discovered what the payment terms were”.

This is not the first time that Zaslav has spoken against its competitor platform Netflix. Recently, announcing its business doctrine, Zaslav portrayed the Warner Bros. as a direct competition to Netflix. He said, “We are open to business”, declaring an openness to licensing content to third parties apart from Netflix. As Zaslav detailed, that plan includes setting a measured goal for streaming subscribers and returning to an emphasis on theatrical releases. This strategy positions streaming as just one of many segments of a multifaceted media firm, in contrast to Netflix’s all-in model.

“We have no intention of being beholden to anyone in particular or to a specific business model,” he said.

These are not new issues for television producers.

In fact, Discovery, pre-Warner Bros. merger, faced its own backlash after it tried to implement a new payment model, spearheaded by now Warner Bros. Discovery CFO Gunnar Wiedenfels, that would see producers having to finance shows themselves and take out loans to cover production costs before receiving payment on delivery.

Where are we heading with this?

Such moves may force distribution companies to also act as production house

If Zaslav has his own way, each streamer will be limited to content their studios produce(or own outright). Meaning that all Paramount & CBS studios content stays on Paramount +, all Universal/NBC content stays on Peacock, all Disney/Marvel/ABC/ESPN stays on Disney + etc.

This could mean higher costs and less choices for the consumer in the long run.

This makes us wonder what’s the choice for production houses?

There are currently 4 major movie studios in Hollywood namely

1- Disney (i.e. owner of 20th Century)

2- Warner Media (i.e. owned by AT&T, NBCUniversal (i.e. owned by Comcast)

3- ViacomCBS (i.e. owner of Paramount)

4- Sony (i.e. owner of Columbia)

It seems Disney, AT&T and Comcast are continuously moving their content from Netflix to their own streaming services (e.g. Disney+, Hulu, HBO Max, Peacock).

Whereas, Sony is currently selling their content to various streaming services including Netflix.

ViacomCBS is flexible at the moment, as they keep some movies for their Paramount+ (e.g. SpongeBob: Sponge on the Run) while selling others to streamers (e.g. Coming2America).

Infact, it is a common understanding that Sony Pictures has a very close working relationship with Netflix and so they won’t be pulling out their content from Netflix any time soon.

Given the above circumstances, can Netflix afford to lose another licensing deal?

What’s in for Netflix?

Since the release of House of Cards, Netflix's first original series, in 2013, the streaming service has prioritized its original content. Extending to recent hits such as Squid Game, Ozark, and Bridgerton – in a long-term strategy designed to insulate its business from the impact of Hollywood rivals pulling content they licensed for their own rival services.

Given the emphasis on originals, it may come as a surprise that licensed content accounts for nearly two-thirds of Netflix viewing hours. Despite spending billions on original content, Netflix continues to rely heavily on classic shows such as The Office, Friends, and Grey's Anatomy. What is scarier is that a significant number of its highest-performance titles are licensed from studios with in-house streaming ambitions of their own. Moreover, In the first two months of this year, 31% of the 150 most-viewed shows and films by British users belonged to Netflix’s competition, and a quarter more by production houses who are coming up with their own streaming service.

So the question remains-

What happens to Netflix when it loses the shows that drive the majority of its viewing hours?

As legacy media companies pull these shows to launch their own streaming services, Netflix's value to consumers may decline just as competition heats up.

Friends, the most popular show among British viewers and Netflix’s biggest hit globally, has already been removed by Warner Bros Discovery in the US along with other hits such as The Big Bang Theory to drive its own HBO Max service. Sky-owner Comcast has also removed big hits such as the US version of The Office to make its Peacock streaming service more attractive in the US.

Earlier this year, Netflix’s market value was slashed by almost $60bn as investors panicked that the decade-long streaming boom has come to an end after the company forecast it would lose millions of subscribers in the first half of this year.

So, overall Netflix confronts three core problems at the moment-

1. First, It isn’t adding subscribers at the same rate it once did.

2. Second, its existing customers are cancelling at a higher rate, and

3. Third, it is also facing a bidding war because of its payment structure along with the rising risk of losing out on licensed content because of price hikes and the production houses coming with their own streaming services.

Bringing us to the big question, How is Netflix tackling the issue?

Netflix has decided to add a new tier to the subscription system that will allow users to include advertisements in their service on a lower cost basis. These ads will help Netflix gather funds that will help them keep up with the licensing costs. People are yet to see this move in action and whether it will help things or make them worse.

In the long term, Netflix will need to extricate itself from such a strong reliance on US major Hollywood studio content, or else risk high levels of churn when others launch fully in the market.

Finally, bringing us back to the war between Netflix and Warner Bros

We will only find out when the companies get head to head with each other in the coming months, however, if the Sandman season 2 release has troubles because Zaslav is unhappy with the payment timeline, this could spell trouble for other Netflix titles as well, with the platform streaming several WBTV hits including The Flash, Riverdale, Supernatural, and All American. While the aforementioned are titles belonging to The CW, which is now predominantly owned by Nexstar, Warner Bros. still holds rights to many of the productions, meaning that should a rumble with Netflix happen subscribers may need to kiss these shows goodbye. The breakup would be an especially crushing loss for fans of Riverdale and The Flash as both series are heading into their final seasons.

That's all for today!

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-Vipul